Hello and welcome to The Download. I'm your host, Dave Richardson, and it is (S)Tuesday, everyone's favorite day of the week. Stu Kedwell, Co-Head of North American Equities at RBC Global Asset Management, welcome back for your regular appearance.

Thanks for having me, Dave. Hope you’re well.

How is your lawn looking?

My lawn might be the best of the summer right now. It's looking fantastic. Very green and growing like a weed, although I pluck the weeds each day.

Look at that. So, are you a pretty disciplined weed picker?

My mom bought me this fancy tool, and I like to go out each night and dispose of the three or four dandelions that have cropped up through the day.

Just for the listeners, I spend a lot of time around investment managers and they are particular people. So, I'm not surprised that Stu has a fabulous weedless lawn. Congratulations on that.

My partner, Doug Raymond says, water the flowers and pick the weeds, which you have to do in your portfolio as well.

See, always back to something investment related. If we were sitting here a year ago, in the first stages of the pandemic coming out of March and April, when the pandemic really hit, and the first shutdowns and there wasn’t a lot of optimism. Of course, markets were already starting to rise up at that point, but as you went through a number of quarters, expectations for companies to deliver on an earnings front were reduced, except in specific areas of the market. But now we fast forward a year, and some parts of the country and some parts of the world are still in lockdown. But very clearly, we're starting to move towards getting past this virus, or at least we hope so. Now the expectations are a little bit different as we move forward and we're seeing that creates some additional volatility. Today, we see the Dow is down about 500 points as we're taping this. How do you think, as we move forward, those greater expectations are going to have an impact on the performance of markets and how you’re investing money for your investors?

Well, it's a great question. And, as we get to this time of the year, almost in any year, markets often start to go sideways a little bit as they wonder what will the back half of the year look like and what will it look like in the next year. So, it’s not entirely surprising that when we get into the middle of May we start to see a little bit of sideways action. But to your point, when markets have been extremely strong as they've been and when markets have gone up a long way, you need even better and better earnings to drive things in the near term. What we saw coming through the first quarter earnings reports is that things were quite strong and they're expected to be quite strong. But people are just having a little bit of a pause to say, well, is it going to accelerate even further? When you think about where we were a year ago, things were bad and we thought they'd get better. Today, things are good and people are wondering, will they get better yet? And there's still a lot of positives to come. Unemployment will still come down, a lot of stimulus, a lot of liquidity. Businesses are in pretty good shape. There's pent up demand. So, there's still a fair amount of optimism for the future. But it's like the markets have kind of acknowledged in the last couple of weeks that we've also come a long way in the short term.

So, has that created a need to shift your portfolio in any way, or is this probably something that you had thought about earlier on and have already made some of those adjustments?

There are two things that drive an investment in the short term. The first is better earnings. So, you migrate to a new scenario around the fundamentals of the business. The second thing is a change in the valuation. In any given year or in any given move in any stock, a good chunk of that move is usually change in valuation. We've certainly seen that in the last six to nine months. So, the thing that we're doing when we go through the portfolio right now is making sure that our investment case for the stocks that we own is based on earnings growth rather than valuation expansion. So, we've talked a lot about the level of interest rates, the level of real interest rates, the impact that has on the purchasing power of your money. That is going to be very supportive to elevated valuations for likely an extended period of time. But I wouldn't want to come in and say to you, let's buy this stock, because today it trades at X times earnings and tomorrow, I think it's going to trade at 2X times earnings. That's not the type of investment case that we want to litter the portfolio with. Versus this time last year, that might have been more the case because when things get better, the valuation is going to get a lot better as well. What we want today is, this is how much the company is earning now, this is how much we think it can earn next year and that earnings growth can drive the majority of the return that we foresee, coupled with collecting dividends. We think that earnings growth will drive dividends, which will hold valuation. That's the way we're looking at creating return in the next twelve to eighteen months.

Would you say the environment for dividend stocks has improved this May versus last May?

Well, it's been different. In the first part of this year, we've seen some dividend stocks, say, the renewable sector where the cash flows are quite certain, but they don't really grow; those stocks have had a bit of a tougher time as interest rates have risen, and those cash flows have to be discounted at the new slightly higher interest rates and that has an impact on their valuation. Meanwhile, a lot of dividend stocks— and this is where we try and focus the portfolio because we are longer-term investors—, where we know we're going to get earnings growth over time; that earnings growth will power dividend growth. Many of the businesses we own do better in a slightly better economy. So, you get the compounding factor of earnings rising and then that drives even better dividend growth as we look into next year. There's also been many of our financial businesses that have been held back from dividend growth because of regulatory incidents where the regulator has said, let's just be extra cautious here. No share buyback, no dividend growth for a period of time as we get through this. But we're rapidly getting to the time when we think that will restart as well.

And as always, we'll check in on your expertise around the Canadian banks and their reporting over the next couple of weeks. But thanks for that, Stu, and thanks for the gardening update, too. I was recently named Canadian Urban Farmer of the Year by urbanites who know nothing about farming magazine. So, my lawn could use your help with the weeding. If you've got some spare time, just roll on over.

You've got it. Any time Dave.

But otherwise let's focus on investing and continue to have success there. And a big part of that is Stu’s Days. Stu we'll talk to you next week.

Thanks very much, Dave. Take care.